Strengthening Poland’s Competitiveness – OECD Recommendations

Remarks by Angel Gurría, OECD Secretary-General, delivered at a seminar in Poland

10 March 2014, Warsaw, Poland

(As prepared for delivery)

Mr. President, ladies and gentlemen,

It is a great pleasure for me to be here today to lead off the discussion of how to make the Polish economy fit to compete in the global economy. Thanks to Poland’s impressive overall economic performance over the last decade, the large GDP per capita gap with your European neighbours has narrowed substantially.

Important reforms have helped to achieve this catch up. For instance, the country has reformed its educational system and upgraded its transport infrastructure. But Poland can do even better to continue to close the gap in living standards relative to more prosperous European neighbours and boost wellbeing for all Poles. Improving firms’ competitiveness will be crucial to achieve this goal.

Today I would like to propose to you a strategy for a more competitive Poland that builds on four pillars: labour market reforms, education reforms, product market reforms and reforms of the innovation system.

The first pillar: Labour market reforms

Poland’s labour productivity remains low, as does its employment rate. Only 60% of all persons of working age are currently employed, which is well below the OECD average of 65%. The Economic Survey that I launched this morning recommends a number of policy initiatives that could help boost employment. And boosting employment will be essential if you want to overcome the important demographic challenges that you will soon be facing. In our view, Poland needs to work on three main fronts:

1. You need to reduce labour market dualism to encourage the build-up of human capital. More than one quarter of all workers have a temporary contract, which is the second-highest share in the OECD. For youth the share even exceeds 50%. Reducing dualism can for instance be achieved by making all contracts subject to the same tax and social contribution regime and by streamlining legal dismissal procedures.

2. Second, you need to better activate the unemployed. The unemployment rate currently stands at about 10%, and above 25% for the youth. To tackle this problem, we urge the government to strengthen the public employment services, to tighten work availability and job-search requirements, and to reduce the tax wedge on labour income to make work pay.

3. Third, you need to make better use of the talents of women and the elderly. Only 53% of all women are currently employed, and for the elderly the share is a meagre 39%. Here, it is essential to expand childcare facilities and pre-school education, to accelerate the planned increase in women’s retirement age and to adjust the replacement rate of pensions.

The second pillar: education reforms

But maximising the use of available labour won’t be enough. If the country wants to be at the forefront of international competition, it has to realise the full potential of its people. That brings me to the second topic: education.

First the good news: the 2012 PISA results confirm the beneficial effects of the structural reforms made to school education at the turn of the century, and of the more recent curricular reform. Poland is one of the few countries that has seen continued progress in all PISA subject areas since 2000, even for the children with the weakest performance. The education system can now be compared with the best in Europe. Also the recent improvements to pre-school education are very welcome as they are an important investment in Poland’s future.

But Poland must not rest on these laurels. Rather, it is high time to ensure that the vocational and tertiary education systems build on this progress and deliver the levels of quality and relevance that businesses and society need. Higher education in Poland – both public and private – has grown extremely rapidly since transition, but the system is very fragmented and needs to be streamlined. Quality is uneven, calling for a greater use of benchmarking and enhanced institutional autonomy. Moreover, greater involvement of employers in higher education is important to ensure that the skills that people acquire better match those that the labour market demands.

The third pillar: product market reforms

We also advocate reforms to boost product market competition as a means to foster competitiveness. Important progress is being made, notably in the area of professional services, which will enable new services firms to expand more easily within the world’s largest market.

But there are still a large number of restrictive regulations that substantially hinder business activity. The benefits of reform in this area might be substantial! The gains in productivity in Poland could amount to some 14% within the next decade.

To realize these gains, registration procedures should be streamlined and the bankruptcy process simplified to facilitate the reallocation of resources to young and innovative firms who are generating about half of all new jobs in most OECD countries.

Furthermore Poland’s business sector is skewed towards micro enterprises with fewer than 10 employees. These firms are far less productive than their slightly larger counterparts. For young high-potential micro firms to achieve greater scale, a consistent reform package is needed to reduce regulatory burdens, increase access to finance, improve labour skills and strengthen management practices. Supporting an entrepreneurial mind-set among Poland’s youth, including by enhancing entrepreneurship education, would also be beneficial.

The economic gains of product market competition are also held back by the direct involvement of the government in potentially competitive sectors. More aggressive privatization in non-strategic sectors would surely yield sizable payoffs. Also, public tenders should be based on the best value for money rather than the lowest price. This will require enhancing staff skills to deal with complex criteria when selecting contractors.

Finally, competition in several network industries needs to be improved. In the rail sector, for instance, the manager of the infrastructure needs to be made fully independent from the operators of rail services. In addition we recommend long fixed-term non-renewable mandates for the presidents of the Competition Authority and all sector regulators during which they cannot be removed without fault.

The fourth pillar: reforms to the innovation system

The fourth and final pillar of our strategy to boost competitiveness relates to the innovation system. Higher investment in knowledge-based capital – an important source of innovation – is crucial to successfully compete in today’s word. Business investment in such capital has been increasing faster than in physical capital in many countries but remains relatively low in Poland. Well-designed tax incentives for R&D as well as direct government support can foster this type of investment.

Another important source of new growth that Polish companies need to embrace is green technologies. Poland still heavily relies on coal as a source of energy. But with climate change this won’t be sustainable unless technologies are developed to cap and store emissions. In addition, Polish companies might need to invest more in renewable energies such as wind and solar power as these will be the energy sources of the future and the government will need to ensure that policies are well-aligned to send the right signals to investors.

A high-quality intellectual property regime is also needed to support the development of knowledge markets, promote knowledge diffusion via the public disclosure of ideas and provide firms with the incentive to innovate. And establishing good framework conditions for other knowledge assets, such as design, data, management and skills, is becoming increasingly important in an ever more knowledge-based world.

Ladies and gentlemen,

A broad agenda of reforms in the four areas I mentioned – labour markets, education, product markets and innovation – should strengthen Poland’s economy and allow it to continue its path of convergence towards the income levels of the more affluent OECD economies. At the same time it is important that macroeconomic policies ensure low and stable inflation and sound public finances without restraining necessary spending on education and innovation.

We at the OECD stand ready to assist you in your quest to achieve better policies for better lives of all Polish citizens.